Chapter 2 - Contracts Flashcards
What are the two additional elements required for a real estate contract?
1) In writing and signed - RE and personal property contracts in excess of $500 require a written contract to be enforceable (Statute of Frauds)
2) Description of RE - accurate, valid, and sufficient description of property. Deeds/Deeds of Trust/Mortgages will be recorded in the public records require legal description
What are the 3 forms of legal description that will be recorded in the public record?
What forms of RE description will not be recorded in the public records (“adequate” property description)?
Legal Descriptions:
- Metes and bounds
- U.S. governmental rectangular survey
- Lot, block, and subdivision
Documents not recorded that just need adequate descriptions:
- RE purchase agreements
- Leases
- Listings
“Adequate” property descriptions:
1) Address of the property
2) Assessor’s parcel number (APN) - the “account number” assigned to each parcel for recording payment of taxes
What are the 5 essential elements of a contract (any contract)?
COLIC
Competent Parties - living, lawful age, sound mind, and mentally competent
Offer and Acceptance - “mutual assent” that shows a “meeting of the minds” that an offer was made and acceptance was reached
Legal
Informed parties - no fraud, misrepresentation, or duress. Fully informed, aware of agreement conditions, and consent to terms
Consideration - may be money, anything of value, or just a statement that consideration exists (love and affection)
What is a valid contract?
Contract contains all 5 essential elements of a contract
What is a void contract?
Agreement lacks any one or more of the essential elements
Ex. - if something is illegal or is impossible to complete
What is a voidable contract?
Appears to be valid but may be disaffirmed because it is missing an element. Party had the right to void the contract, if done in reasonable time. The party not suffering cannot void the contract
If both parties are operating under mutual mistake, either party may void the contract
What is an unenforceable contract?
Appears to be valid, but it there is a disagreement, the courts will not get involved in the resolution
Ex. - if a RE contract was not in writing
What is an expressed contract?
Contract where words (written or oral) were used to show intentions
What is an implied contract?
The actions of the parties demonstrate their intent
Ex. - you sit down at dinner and order food
What is a bilateral contract?
Two-sided where more than one party is making a promise to do something
A buyer offers to buy a house if the seller puts on a new roof
What is a unilateral contract?
One-sided where one party is bound to perform but the other is not (an option)
The police will pay $5k for information, but will not pay unless they get the information
What is an executed contract?
One that has been fully and completely performed
What is an executory contract?
One that has not yet been fully performed
What is the rule of reason?
Places an obligation on all to conduct ourselves as a reasonable person would
What terminates a contract?
1) Performance
2) Mutual agreement
3) Impossibility
4) Operation of law
Assignment of contracts
Contracts are freely and fully assignable unless prohibited in the agreement
If 3rd party does not perform, the original (second) party will be liable to perform - called secondary liability
What is novation?
Substituting a new contract in for an old one
What is a novation of parties?
Where a new party (person) is substituted for an existing one
In a breach of contract, if the buyer defaults and the seller rescinds (terminates) the agreement they may exercise what options?
1) Sue for specific performance - will require buyer to perform duties specified in contract
2) Revocation - seller revokes the contract and retains the earnest money deposit
3) Rescission - seller decides to call of contract and returns the earnest money deposit to the buyer - complete reversal of contract
4) Sue for damages - buyer is required to pay seller for any costs associated w the sellers hardship
In a breach of contract, if the seller defaults and the buyer rescinds (terminates) the agreement they may exercise what options?
1) Sue for specific performance - will require the seller to perform duties in contract
2) Rescission - calls it off and gets back the earnest money deposit
3) Sue for damages - buyer may be entitled to a judgement against the seller for damages
What are liquidated damages?
The remedies either party may recover through litigation may be limited by the terms of the contract. If contract pfe-addresses damages they would be liquidated damages
What are punitive damages?
Go above and beyond liquidated damages and are sought to “punish” the breaching party and compensate the injured party
What is the statute of limitations?
The legal limit to the time frame under which the injured party can legally sue the breaching party. This varies from state to state
What is an open listing?
Seller agrees to pay a commission to any broker who procured a ready, willing, and able buyer at the list price and terms, or such other price and terms agreeable to the seller
No exclusivity to the broker
What is an exclusive agency listing?
The seller agrees to hire the broker on an exclusive basis, and agrees to pay a commission to the exclusive broker when the exclusive broker, or any other broker produces a ready, willing, and able buyer
Gives exclusivity to the broker and agrees all brokers must go through him
But owner may sell property himself without owing a commission
What is an exclusive right to sell listing?
Seller hires the broker on an exclusive basis and agrees to pay a commission to that broker when producing ready, willing, and able buyer
All brokers must go through that broker and if the owner sells the home will still owe broker a commission
What are the commission types?
1) Percentage of sale price
2) Flat fee
3) Net listing commission - commission on what seller must net from sale. Broker keeps what is over a certain number. Creates conflict of interest
How can RE listings terminate?
1) Performance
2) Expiration
3) Revocation - broker or seller executing right to terminate listing
4) Abandonment - broker failing to actively market property
5) Mutual consent
6) Death, bankruptcy, or loss of competency
7) Material change - circumstances of property changing
8) Destruction of property
9) Agency coupled with interest - if in agreement there is a personal interest, like broker is partial owner, seller cannot fire broker unless coupled interest is also terminated
What is a purchase agreement?
Document that creates agreement btwn seller and buyer that clearly spells out right and duties of each party, purchase price, and terms and details of the transaction
What is an addendum?
If parties need to update or add terms to an agreement, they must prepare an addendum to show written evidence of agreement of subsequent terms
How do you refer to the buyer and seller in contract process?
Offeror - making the offer
Offeree - receiving the offer
What options does the offeree have upon receiving an offer?
1) Accept
2) Counteroffer - if any change is made, no matter how small. Essentially a rejected offer
3) Reject
4) Do nothing
5) Withdrawal or revocation - offeror may withdraw offer, up to the time of notice of acceptance from offeree
When does an offer become a contract?
Once it has been accepted by the offeree and communication of that acceptance had been the received by the offeror
Closing process - escrow (settlement)
Escrow is “opened” by placing the accepted agreement into the hands of the escrow agent along with the earnest money deposit (EMD)
EMD is not legally required if there are sufficient promises btwn buyer and seller
What is equitable title?
What is legal title?
During the escrow period, the buyer is considered to have equitable title or an equitable interest because the buyer had the property under contract and no one else does
Legal title is secured once the closing is completed, deed transfers title from seller to buyer, and the deed is recorded
What is the real property owner’s legal bundle of rights?
1) Possession
2) Control
3) Enjoyment
4) Exclusion
5) Disposition
What are the parties to a lease?
Owner - landlord - lessor
Non-owner - tenant - lessee
Under the statute of Frauds, a lease of one year or more must be in writing
What is a leased fee and leasehold interest?
Lease fee - once agreed to the landlord has a leased fee meaning they own the property but have surrendered rights and possession to the tenant
Leasehold interest - the tenant has this which is the right to possess and use the property, but do not own it
What is an estate for years?
Lease with a definite start and end date. Term can be of any duration. If death occurs, unexpired time is inherited by estate of the tenant. Lease is not terminated
What is an estate from period to period?
Lease has standard period of time which automatically renews for same period over and over again until one party gives notice to end
Also binding on estates for unexpired period
What is an estate at will?
Lease that is open-ended with no specific termination date with notice required to end. Must have reasonable notice given
What is an estate at sufferance?
Status when the lease has ended but the tenant remains in possession without the landlords consent
What are the lease payment plans for a commercial lease?
1) Gross lease - fixed monthly where landlord pays operating expenses of the property
2) Net lease - tenant pays base rent and all operating expenses. Triple net lease - lessee pays rent, operating expenses, insurance, and common area maintenance
3) Percentage lease - base rent plus percentage of gross business income
4) Graduated lease - agree payment increases over time
5) Indexed lease - tied to an index for inflation
6) Escalation lease - similar to indexed but increases through increases in operating expenses
What are leasehold improvements?
Alterations to leased space, usually done at the landlord’s expense and remain part of the leased space
What are trade fixtures?
Personal property that are installed and make them a permanent fixture (at tenant’s expense). Normally installed and become part of the RE, but can be removed by tenant at end of the lease
What is a constructive eviction?
Means landlord has done or failed to do something that had the effect of denying the tenant use and enjoyment of the leasehold
What is a sale leaseback?
An arrangement where the buyer and seller agree to a leasehold. Seller remains in possession of property and compensates the buyer for the possession
Who is the optionor and optionee in an option contract?
Optionor - owner of property
Optionee - one buying the option
The optionee must offer option money, or agreed valuable consideration, in exchange for the option to purchase or not to purchase
What is time is of the essence in a contract?
It means that if the parties do not do something within the allotted time in the contract, the other party may declare a breach
